Avient Corporation

Good morning, ladies and gentlemen, and welcome to the Poly One Corporation second quarter 2019 conference call. My name is Catherine, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We will have a question and answer session at the end of the conference. As a reminder, this conference is being recorded for replay purposes. At this time, I would like to turn the call over to Joe DeSalvo, Vice President, Treasurer, and Investor Relations. Please proceed. Thank you.

Thank you, Catherine. Good morning and welcome to everyone joining us on the call today. Before beginning, we would like to remind you that statements made during this conference call may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements will give current expectations or forecasts of future events and are not guarantees of future performance. They're based on management's expectation and involve a number of business risks and uncertainties. any of which could cause actual results to differ materially from those expressed in or implied by the forelooking statement. Some of these risks and uncertainties can be found in the company's filings with the Securities and Exchange Commission, as well as in today's press release. During the discussion today, the company used both GAAP and non-GAAP financial measures. Please refer to the earnings release posted on the Poly1 website where the company describes the non-GAAP measures and provides a reconciliation from the most comparable GAAP financial measures. Operating results referenced during today's call will be comparing the second quarter of 2019 to the second quarter of 2018, unless otherwise stated. Joining me today on our call is our Chairman, President, and Chief Executive Officer, Bob Patterson, and Executive Vice President and Chief Financial Officer, Brad Richardson. Now I will turn the call over to Bob.

Well, thanks, Joe, and good morning. At 74 cents, we finished the quarter at the high end of the range we communicated when we raised our projections in early June. And this represents a 4% increase over last year. Sequentially, margins expanded in all segments when compared to the first quarter of this year. This helped us to offset much of the weakness we continue to experience in certain end markets and regions, as well as unfavorable foreign exchange. And as a result, we are now increasing our outlook for the balance of 2019, such that we expect EPS to expand 4% to 6% for the full year. I'll have more to say on our outlook in a moment, but for now we'll focus on current results and initiatives. Compared to the prior year's second quarter, our engineer materials segment led our performance with a 22% increase in operating income. I am very pleased with the investments we have made in composites, wire and cable applications, which have helped us to drive this growth. As you know, this has been a significant area of focus for us, as we build out a portfolio of more specialized materials and solutions in this segment. I am also pleased with the expansion of our sustainable solutions portfolio, which was up 7% year-to-date versus last year. These products are focused on reducing carbon footprint with lighter weight materials, increasing the recyclability of packaging, and reducing water usage to name a few of their benefits. Our efforts to build and leverage this portfolio with our customers cannot be overstated. We're playing a crucial role in the growing desire for brand owners and consumers to bring more sustainable products to market that create value for our planet and our performance. At a time when global trade wars and political uncertainty are negatively impacting commerce and consumer confidence, sustainable solutions are expanding. This, of course, is in stark contrast to what we are seeing in China and Europe auto, for example, which were down 23% and 7% respectively in the second quarter. And building and construction in the U.S. was, again, weak compared to last year. In fact, overall macro conditions really haven't changed much since we spoke last in April, and looking back at our improved performance against what we expected at that time, the drivers largely fall into the self-help category. We have reduced costs, done a better job of pricing, and improved mix led by composites and growth in SEM. We also benefited this quarter from several years of focus on end market diversification. Two of our key markets, healthcare and packaging, which now represent a combined 25% of our total company sales, were both up in the second quarter at 3% and 4% respectively, all of this helping to offset the demand weakness in other markets I just described. In addition, we also have the ability to pull on another self-help driver that you have listened to us describe often in the past, and that is our Lean Six Sigma team and culture, with over 4,100 associates who are trained in Lean principles, We are continually seeking and seizing opportunities for quality and efficiency improvements. At any given time, there are around 450 process improvement projects in flight, and those results, once completed, generate true bottom-line value. More recently, Poly1 customers are now directly benefiting as well. Our Lean Six Sigma Customer First service offering has been extremely well-received since launching it in 2015. and to date we have trained more than 180 customers in LSS methodology and project management, and they are now implementing process improvements in their own companies. LSS is no doubt an investment, and while we have been taking prudent actions to control spending in discretionary areas this year, we have not cut back in the strategic investments that enable our long-term strategy. We remain steadfast in our invest-to-grow approach, and continue to pursue the organic improvements and technology advancements that allow us to best serve our customers. And one of the most important measures we use for gauging our performance in this area is our vitality index, and that measures how much of our revenue is from products introduced in the last five years. For the second quarter, we remain world-class at 35%, and we have invested in innovation in our longer-term technology portfolio. and you will see the parallels between our R&D focus on sustainable solutions and our vitality index will strengthen even further. We see this dynamic currently through our composites and barrier technology offerings, and going forward, new products that enable our customers' sustainability goals will increase in concert as well. Brad will now provide a segment review and go a little deeper on our performance for the second quarter. Brad?

Well, thank you, Bob, and good morning, everyone. Let me first start with our GAAP results. In the second quarter, we reported GAAP earnings per share of 54 cents. Special items in the quarter resulted in a net after-tax charge of $15.2 million compared to $5.9 million in the prior year. The increase is primarily related to the turnout adjustment associated with the FiberLine acquisition. as the business performance in the first six months has been exceptional and exceeded our original expectations. Adjusted EPS for the quarter was 74 cents, a significant sequential improvement from the first quarter, where we reported 64 cents. This sequential growth in adjusted EPS was driven by a $9 million improvement in operating income on flat sales of approximately $900 million. As Bob mentioned, the second quarter performance was made possible by our ability to expand margins with better pricing, lower cost, and improved mix. We're particularly pleased with our team's execution to navigate the macro external challenges that persist across most end markets and regions. So let me provide some additional perspectives. Regionally, excluding acquisitions, sales in Europe were down 7.5% due to weaker foreign currencies, which negatively impacted sales 6% and softer in market demand in automotive and construction applications. Asia sales were down 5% due to FX and on an organic basis were flat as weaker demand for automotive applications was offset by growth in the packaging end market from our barrier additive technologies. From a key end market perspective, transportation sales, which are primarily automotive related, make up about 16% of Poly 1 sales. This quarter, we experienced an 8% decline in global transportation sales, with North America and Europe down 7%, and Asia down 23%. Weaker transportation sales impacted all four segments. The construction end market accounts for about 10% of total company sales and was down 7% compared to the prior year's second quarter. These sales are primarily in North America and most significantly impacted our PP&S and color segments. In reviewing our segments, as Bob mentioned, SEM led our performance. growing revenue and operating income 18% and 22% respectively. Organically, operating income increased 4%. The benefits of price, mix, and strong performance from composites and North America wire and cable sales were partially offset by negative effects and underlying weakness in Europe and Asia. Healthcare was also a bright spot as SEM sales in this end market improved 24% in the second quarter. New closes in healthcare applications take significant time, dedication, and technical know-how. That's why there's specialty, and that's why customers are choosing Poly1 to collaborate with. Last quarter, we closed a fantastic healthcare project with a long-time customer. a large global medical device manufacturer. We'll call back in 2015 for those of you who are at our Investor Day, where we talked about our Versaflex TPE, providing material substitution of rubber and syringe stoppers. The performance attributes of TPEs are significant, safer, cleaner, more efficient by taking several steps out of the manufacturing process, and they also provide greater design freedom. And over the last four years, we have continued to see growth in applications providing an alternative to traditional materials in various medical applications, such as syringe stoppers. This past quarter, we did so with a new business close for a customer's product line, the first of four models, all of which will be launched by 2020 with an expected annual revenue of $10 million. Looking at our color segment, revenue and operating income were down 2% and 7% respectively, impacted by weaker foreign currencies. From an end market perspective, growth in packaging was more than offset by weaker automotive sales, primarily in Europe and Asia. Packaging continues to be a great story as sales were up over 6% for the segment, driven by the continued market demand for our barrier additives. These sustainable solutions extend shelf life, improve recyclability, reduce material consumption, and allow for the design freedom made possible in PET bottles. And as you know, barrier technology has been an area of strategic investment for us for years, and it continues to deliver returns. With regard to PP&S, their margins expanded 200 basis points sequentially from Q1. This was driven by sales of our Gion brand formulations in North America, which modestly improved from the delayed and difficult start to the construction season in the first quarter. That being said, it remains down year-over-year. Additionally, the weak demand in automotive end market, which accounts for about 16% of PP&S's sales, also negatively impacted year-over-year results. Overall, this led to a 9% and 14% decline in sales and operating income compared to the prior year. Distribution performed very well, given the backdrop of some of the end markets that we've just been discussing. Operating income was up 7% on operating margin improvement, driven by mix in pricing. The mixed improvement was primarily related to gains in healthcare applications and outdoor high performance. So to summarize, Sequential margin improvement in each segment demonstrates that the actions and projects we put in place have been effective in navigating the clearly and continued sluggish end markets and regional demand slowdown. At the same time, our prior and ongoing investments in sustainable solutions and specialty M&A continue, which is making important contributions to grow now and positioning us very well for the future. Before I hand the call back to Bob, I want to point out our recent share repurchase activity. We've said we will do so opportunistically as one of the ways we deploy cash to generate shareholder value. The second quarter certainly defined opportunistic from our perspective, as we bought back one million shares at an average price of $26.91 a share. So Bob, I'll turn the call back to you.

Well, thanks, Brad, and certainly some of your last points on where we are investing are important. With respect to barrier technologies and composites, these are two sustainable solutions that have been a consistent theme in our communication, and they have been consistently growing as a result of these prior investments. Last quarter on Ernie's call, we spent some time discussing fiber line solutions in detail. We discussed both the near-term demand and the tremendous long-term opportunity that 5G and other fiber optic cable requirements expand. This morning, I'd like to highlight another important area where composites are currently growing and will continue to play in the product design for the foreseeable future, and that's in reinforcement applications. We often talk about composites replacing metal, glass, or wood, But many times, they are used to reinforce these materials as well. By applying a thin composite tape to reinforce an underlying base material, we can improve the strength of that material by up to 400%, which takes the weight out. And it's taken us a few years to get here, but we are finally realizing multiple opportunities in transportation as well as in recreational equipment. Overall, composites reach a record level of profitability at 10% return on sales. Those sustainability considerations are increasingly important. And just like our customers, Poly1 is taking a proactive role to both design and leverage the inherent sustainable benefits that plastics can have on the planet, as well as our performance. Through our product portfolio and operations, we take pride in our contributions to sustainability And hopefully we can begin to shift the narrative. Plastics are sustainable, but plastic waste is not. And that's why we joined as a founding member of the Alliance to End Plastic Waste earlier this year, along with other leaders in materials supply, as well as several of our large global customers and partners. Earlier this month, I attended the Alliance's board first CEO meeting, And I couldn't be more proud of the single voice and commitment underway to reduce plastic waste through four pillars of focus. Infrastructure development to collect and manage waste and increase recycling, especially in developing countries where the need is greatest. Second is innovation to advance and scale new technologies that minimize waste and make recycling and recovering plastics easier. Third, education and engagement of governments at all levels, businesses, and communities to mobilize action. And fourth and finally, cleanup of concentrated areas of plastic waste already in the environment, particularly major rivers that carry vast amounts of land-based plastic waste to the ocean. Collectively as an alliance and individually in each of our company's day-to-day endeavors, we are working to address the waste problem. At the same time, we are educating consumers and companies on the important role plastics play in these solutions for many years to come. And we expect that this will bode very well for Poly1 as a specialty provider focused on sustainable solutions. As our industry collaborates to set those records straight on the importance of plastics, and as end consumers understand the inherent sustainability benefits, this will ultimately lead to growth for us. And this is one of the reasons why I have an increased confidence in our ability to deliver earnings growth this year. When we started the call today, we initially commented on the better-than-expected near-term results with where our current quarter ended at 74 cents, and we are now raising our outlook for the full year to 4% to 6% growth over last year from an adjusted EPS perspective. And I think this is saying a lot. Market conditions are not great right now, and of course this assumption of ours assumes that they don't get any worse. As we already described, many end markets such as China and Europe auto are down substantially, and U.S. construction has had a slow start to the year. In addition, the world continues to trade cautiously as a result of global trade fears, and no one seems to be able to predict what will happen next. At times like this, we have to focus on what we can control, With this in mind, I am pleased with what we have accomplished so far this year. The self-help initiatives we discussed throughout our call today have made a difference and will do so for the balance of the year. But we also have to look past 2019 and continue to invest in innovation, commercial resources, and specialty acquisitions to drive long-term growth. In short, we are managing for today while leading for tomorrow. That concludes our prepared remarks for today. I'd like to now open the call up for questions.

The call lines are now open. As a reminder, you will need to press star one to ask a question. Please limit your questions to one question and one follow up. And our first one comes from Mike Harrison with Seaport Global. Your line is open.

Hi, good morning. Good morning. I was wondering regarding some of the cost actions that you've taken, were there specific segments that were receiving greater focus? Are these actions complete at this point or are there more to come? And I think you commented that you're continuing to invest in commercial resources, but just maybe comment on how you balance trying to take out costs with how you want to continue focusing on organic growth.

Yeah, the actions are completed, Mike, and they really were across all segments as well as at corporate. And with respect to your last question to put things in perspective, sales headcount this quarter was actually 3% higher than it was in the year ago, second quarter. So that balance really comes in, you know, where we're controlling discretionary costs, back office, resources across the company as a whole. And, you know, that is, of course, always a challenge with respect to doing those actions and trying to invest for the future. But I think we have, I think we've found the right balance.

All right. And then in terms of the strength that you're seeing in engineered materials, just wondering how sustainable you feel like that could be given the momentum that you're seeing in certain areas of Of course, under the backdrop of some macro uncertainty and underlying macro weakness.

Yeah, I mean, I think we're right in the middle of macroeconomic weakness. So to see the growth that we have gives me a lot of confidence in the underlying portfolio and performance of the segment. My expectation is that we will see some traditional seasonality in this business in the third and fourth quarter, with the second being our strongest. But if I put that in the context of how well we're doing versus year-over-year performance, I feel very good about the sustainability of the results.

All right. Thanks very much.

Thanks, Mark.

Thank you. And our next question comes from Mike. Sison with KeyBank, your line is open.

Hey, guys. Nice quarter there. So if you think about the second half, Bob, you're looking for earnings growth to accelerate versus the first half. And as you noted, it doesn't seem like demand is getting much better. So can you maybe walk us through some of the drivers of the improved year-over-year earnings growth in the second half?

Yeah, I mean, I think, first of all, Mike, some of it is obviously just relative to where comparable results were in the prior year. If you recall from, you know, our third quarter discussion last year, you know, September was one of the worst months we've ever had, and that really led to a really difficult fourth quarter. So that plays, I think, a role, Mike, in – you know, in terms of how the year shapes up and how that earnings growth takes place over the back half of the year. We obviously knew that when we talked a quarter ago. And what's different now, though, is really, I think, our ability to deliver on the cost reductions, the pricing improvement, and margin expansions. And lastly, you know, really just the underlying performance in engineering materials. So That's what really gives me confidence. Again, that assumes that things don't get any worse, and that may be a big assumption. But with that in mind, that's where we come up with that full-year estimated EPS growth.

Got it. And then composite seems to be getting a lot of momentum here. Can you maybe talk about where you're at in terms of profitability and size of the business and maybe give us some feel of how – fast that business is growing year over year?

Yeah. Um, so in total, when I combine, you know, fiber line with what, uh, you know, poly one already had in the composite space, which, you know, we have put together over the last four or so years through, um, you know, a series of acquisitions, um, you know, composites is getting close to being about a $200 million business. Um, We had, that's on an annual basis. As you know, we invested quite heavily in thermoplastic composites over the last few years, and that is just now starting to turn a profit. So when you put the whole thing together, we are now well into the black. So really appreciate where we are from a composites perspective. Admit that fiber line is a big part of that, which was a recent acquisition at the beginning of this year. And, you know, their results are really doing better than we expected. At the time we did the deal, you know, FiberLine was doing about $12 million of EBITDA and is exceeding that this year.

Great. Thanks, Bob.

Thank you. And our next question comes from Frank Mitch with Fernium Research. Your line is open.

Hi, guys. It's Aziza. I'm for Frank.

Aziza?

Hi. First off, on the buyback, I just wanted to get your thoughts on the balance of the year and if any level of buyback is embedded in that 4% to 6% EPS growth forecast.

So we typically don't ever give any, you know, projections on what, you know, our plans are with respect to the share buybacks, and so don't intend to change that right now. it may be something that, you know, helps us get to a higher level of performance if we find that, you know, it's opportunistic to keep doing so. But at this point, I think with the margin improvement, cost reductions, and performance in SEM, we feel comfortable getting inside that range, you know, with the shares that we've bought back already this year. So hopefully that helps put that in perspective for the second half.

Okay. And On the M&A environment, any thoughts on possible acquisitions? Are composites still the favorite sector?

We're always looking and certainly looking at, it seems like, lots of stuff. I would absolutely love to build out the composites portfolio in a faster way. As you know, Chris Patterson joined us in November of last year, who has a long history and background in composites. I think with him, here as part of our team that's only going to help us get that done faster. So certainly an area of focus, you're spot on in that regard.

Okay.

Thank you. Thank you. Our next question comes from Colin Rush with Oppenheimer. Your line is open.

Thanks so much. Can you talk a little bit about the opportunities for margin expansion and particularly gross margin expansion on the specialty engineered materials and how you're balancing that with your growth plans?

Yeah, I mean, I would say, you know, look, first of all, with respect to, you know, the expectations that we have, if you just look at where we are in the second quarter, Colin, relative to what we did in the first quarter, and, you know, in many respects, you You know, for the company as a whole, sales were effectively flat. We did see margin expansion. You know, across the board, it really was the categories that I've already mentioned. So, you know, we'll continue to see the benefit of the cost reductions in the second half of the year. You know, I do think that can only just on our own better pricing and how we have been managing things like freight, freight costs, implementing surcharges, et cetera, and being more tactical in that regard. you know, also remain an opportunity. And so that, I think, really kind of summarizes some of the tactical stuff. But, you know, when it just comes back to, you know, what we do and how we do that with our specialty materials, I think, you know, we have the opportunity for better margins and pricing improvement. And that's not any one particular move. It's just how we actually manage the portfolio of a whole. So it's kind of hard to describe that. really in an elevator speech how that could work for color and engineering materials, but that's where the focus is.

Okay, that's helpful. And then just shifting gears on the distribution business, you know, is there, you know, some growth there, like meaningful growth there? I mean, obviously you're kind of running at a similar run rate to the second half of last year and here in the first half. Is there something more that you guys can do there? Is that an opportunity or should we be thinking about that as kind of a flattish situation?

Well, I mean, if you look at the second quarter, I mean, sales were actually, you know, down versus last year, but operating income was up. So I give the team a lot of credit for, you know, managing pricing, doing the things that I just talked about around discipline and transactional basis, but also managing inventory levels. And that can play a huge role in the profitability of a distribution business in any one quarter. So, Our operating income growth really comes as a composite, if you will, of all those things. Underlying demand right now is not great, right? Even in North America and where we're seeing things, you know, and that's impacting distribution. So, in the short term, just based on what we're seeing from a macro standpoint, I don't have, you know, expectations for a high level of growth and distribution. Longer term, of course, there remains a lot of opportunity to expand this business with more commercial resources and investment. This is a business that can be influenced by having more sales and marketing resources. We've seen it year after year, and that's one of the reasons why, you know, I said our sales force is still up 3% on a headcount basis this year. Okay.

Thanks so much, guys.

Thank you, and our next question comes from Ben Callow with Baird. Your line is open.

Hey, thanks. Hey, Ben. Hey, guys. So just back on the question around acquisitions, maybe, Brad, can you just kind of talk us through the levers you have for liquidity and kind of the deal size that you're looking at and where your leverage ratio targets get out of hand?

Yeah. Yeah. I'm happy to do that. I mean, we had, as you know, as you'll see in our queue, our liquidity as a corporation was right at about $400 million as we finished out the second quarter, so a very strong position. You know, our net debt to EBITDA was a little over three, and that's been coming down. It went up a little bit because of the fiber line acquisition, and that will continue to trend down. throughout the year as we generate cash. So, you know, I don't think our view on acquisition has changed. We've said, look, you know, for the right opportunity, we'll go up over three, you know, maybe even the upper band of three, but we have to have a clear line of sight in order to be able to get back below three in an 18- to 24-month period. So our financial framework in terms of how we look at this hasn't changed.

Great. And then, you know, you talked about, Bob, you talked about the integration of some of the stuff you've done in engineered materials. Could you talk about the color acquisition MESA and just how that's been performing?

Yep. And actually, you know, I've done a number of deals in the last, you know, few years in the color area. So MESA, we also, you know, picked up the Rutland inks. business, and then more recently, ECAP, you know, based in Spain. All three of those businesses are performing better than they had in the year prior to us acquiring them. They've done a great job of really becoming part of Poly One and fitting well with our culture. That's so important in the first year. Everyone has had an improved safety record. We've retained all of our customers, retained all of our key employees, and seeing Very good integration to date. So I'm very pleased with, you know, those three acquisitions, which really kind of accounts for the last couple of years of activity in color. Mesa itself has brought us some interesting technology in one or two markets where we didn't have much of a presence before. So, you know, we're excited about that, too.

And then finally, one of your competitors reported, I think, yesterday or the day before, and their EM business, I think, was a little weaker than expected. Can you just kind of walk us through maybe the differences in what you're seeing in that business and the strength in your business?

Thanks. I'm not sure I can comment on, you know, anyone else's, you know, performance. But, you know, from our perspective, you know, the engineer materials business, did see weakness in some of the areas that really are getting a lot of headline attention right now, like China and Europe, and specifically, you know, in transportation applications. So that's true. I mean, there's an underlying macro effect there. What has really made a difference for us in our results this year has been that we have obviously added fiber line You know, the growth in fiber optic cable and specifically that longer term pull for 5G is just marching forward, right? And it hasn't been influenced yet really by any of this macroeconomic noise. So that's a good guy. And the composite wins. I mean, I think that there's a lot to be said for just winning new business out there, regardless of what's going on in the economy. And I think those are really two of the big reasons for the growth. So it's really around 5G, fiber optic cable, and wiring cable applications, as well as composites in general. And that probably is the biggest differentiator. Great.

Thanks, guys.

Okay, man.

Thank you. And next we have Dimitri Silverstay with Buckingham Research. Your line is open.

Good morning, guys. Thanks for taking my call. Congratulations on a solid quarter. Thank you. Couple of questions. First of all, in terms of your raw material environment, it should be getting better for you, I guess, given particularly the recent declines in some of the upstream chemicals. Can you talk about what you see happening in the second half of the year? And not just in the commodity plastics area, but the other stuff that you buy as well, the pigments, the TiO2, whatever it may be. How are you looking at your basket of raw material costs in the second half of the year?

Yeah, so, I mean, right now what I would say, Demetri, is the basket's probably moderated from a year-over-year standpoint, but there really are probably a couple of things moving in opposite directions. So a number of underlying base resins have come down slightly versus the prior year, but where that's been offset in terms of our total spend and impact has been around you know, some of the special sauce ingredients, if you will, like dye stuffs for our color segment. There was a fire and explosion at a plant in China earlier this year that has had a ripple effect through anyone who is buying those materials. And so that has actually skyrocketed. So as I stand here right now, I'd say, well, some things have gone perhaps favorably, but we've had some of the other special sauce items that have gone against us. I give the team credit for managing through both of those scenarios and doing well because we are getting margin expansion, but that's kind of how I see things right now. There's nothing that I would say that's different, Dimitri, about how the second half plays out versus what we just saw in the second quarter, if that helps.

Okay, that does help. Thanks, Bob. And then as a follow-up on the PP&S business, You spent several years sort of moving it away from the commodity, more commodity construction-type businesses and more into medical and other stuff, and that was sort of driving your margin expansion. And then we get into this construction market slowdown in North America, and it seems like PPNS is sort of behaving like it behaved prior to your making this move. So can you kind of size for us the relative sizes of the business and PPNS that's still going into construction? and more traditional applications versus the repositioning that you've done into medical and some of the higher growth and more stable markets?

Yeah, I can. And, look, I'd say that this business still does have, you know, a concentration of sales in those two end markets, reliability and construction, as well as transportation here in the U.S. So, Building construction, I think, is right around 25% to 30%. Transportation is around 17%, 18%, high teens, to put things in perspective. But while we're on that word perspective, if you go back in time and recall, there was a time when this business was almost entirely housing and auto, right? So we've really come a long way from where we were, and yet we're feeling the impact of slower conditions in those two end markets we just described. But I can tell you, if it hadn't been for the work that we've done over the last decade, it'd be a lot worse. So, you know, we have to take that into account that, look, we're still connected to those two industries. And when they're down, we'll feel it. But nowhere near to the extent that, you know, we would have, say, seven or eight years ago.

Okay, Bob, that's helpful. I appreciate that perspective. So it does look like over 50% of your sales are outside of the kind of the old traditional markets for this business.

Correct.

Okay, thank you. Sure.

Thank you. And our next question comes from Jim Sheehan with SunTrust. Your line is open.

Thanks. Good morning. Could you provide a little more detail on how you're reviewing the 5G opportunity? Just how large is that addressable market, and how quickly do you expect it to ramp?

Yeah, so I think it's going to – Well, first of all, for 5G is going to take place, you know, there's going to be a global pull for it. I would say that, you know, I probably talked about this on our last call, my recent visit to China where, you know, you can just see towers going up on every other corner and block. So they're going to be a leader in terms of getting out there and actually getting an installed base. I think that what you'll see is actually something that probably looks similar to how other generations have expanded. So, even if you look at 4G right now or predecessor technologies, they don't encompass the entire United States. If I pick the U.S., for example, right, there's still plenty of places that don't have access to the latest technology. So, One of the things that I like most about 5G is that this is a multi-year growth opportunity for this business and for our segment. It's not something that's going to happen in one year, and I really believe it will take place over the course of 12 or 15 years, but be a very solid and steady double-digit grower for us. So that's how to put that in perspective. And notwithstanding just kind of all the noise around Huawei and all that stuff that's going on right now, technology is going to move forward, right? And people are going to put this in if they perceive it's better. And so I don't see that changing as time moves on.

Thanks. And regarding performance products and solutions, how are you evaluating your strategic options for that business at this point in time?

I don't think there's anything different to say about that with respect to how we think about our portfolio. So, no new news.

And on that segment, would you say that second quarter represented just the catch-up from maybe business that was lost due to weather in the first quarter? Or, you know, how sustainable are your second quarter results in PPNS?

Oh, I mean, I think there's certainly... First of all, yeah, you're right in pointing out that the first quarter was very difficult just in terms of how things started out from a weather impact in the construction space. So I think there's some pickup. Year over year, I'd still say construction is down. And as a result of that, you see the PPNS segment impacted by it, but much better than what we saw in the first quarter, and I believe that's sustainable. So My sense is if you just want to put things into perspective here for the balance of the year, you'll see some traditional seasonality with respect to Q3 and Q4, but I'm not expecting anything else beyond that. So my view where we're at is quite sustainable. Thank you.

Thank you. And our next question comes from Kevin Hosevar with North Coast Research. Your line is open.

Hey, good morning, everybody, and nice quarter. Hi, Kevin. Brad, cash flow is pretty strong in the quarter, and in particular, like working capital, you control that quite well. So I'm wondering what drove that, and what type of cash generation do you think you can realize this year?

Well, Kevin, as you know, I mean, we continue to have a laser line of sight focus on our working capital. I think we're best in class in terms of our working capital as a percent of of revenue, and the organization clearly is focused on that. And look, we're on track. I said last quarter, and I feel very good about our ability to generate $200 million of free cash flow this year, and that's after funding in our capital program. So again, it's a combination of obviously the earnings performance, but then the working capital to drive that $200 million of free cash flow.

Okay, great. Bob, did I hear you right? Did you say that composites had a 10% margin now? If so, if my memory serves me right, that seems like a nice improvement from where it was a year or two years ago. Maybe correct me if I'm wrong anywhere in there, but if I'm right, what's driving that nice improvement? As it's growing, you're just getting nice leverage to the bottom line. A fiber line is that adding to the margin profile? Maybe just help me understand how that's improved and how should we think of the margins there over the next two, three years?

Yeah, well, as you know, we don't really get into specific product line detail for obvious reasons. I can tell you that certainly FiberLine, you know, helped with that margin improvement as we added it to our portfolio this year. But if you look at the legacy businesses that we have in composites, Kevin, you know for Probably two years it was running, you know, on a negative EBIT basis just based on the level of investment we had in it. And those have turned positive in the first half of this year. So while those legacy businesses may be in the low single-digit type territory, we're seeing really good growth. And particularly around, you know, today on the call I talked about these reinforcement applications. You know, many of these are wins that have taken us three years or so to start to actually bring into the portfolio. So I feel very good about our longer-term projections with respect to getting that business, you know, up into the double digits here. It's not there yet, but on its way. Okay, great. Thank you very much.

Thank you. Our next question comes from Lawrence Alexander with Jeffries. Your line is open.

Hi, Adam Bubis on for Lawrence today. I was wondering, firstly, have proprietary products seen volume swing more or less in the total business?

Yeah, I think that, you know, it really does depend by end market. It's difficult to answer that question quickly because I'd say, well, I can look into transportation and say, a large chunk of that is specified material and proprietary in nature, but if they're making less autos, it's just down. So that doesn't really say anything about the underlying technology of us and whether or not proprietary or standard is moving that. So it's difficult to bifurcate that impact. Where I think, though, that we have seen the greatest impact from you know, proprietary solutions has been in these sustainable applications, particularly in barrier properties, packaging, and those are certainly some of the best performing products that we have this year. So that's the best way that I can answer that and don't really have a pie chart that would sort of break things down by proprietary versus not so.

Okay, great. That's helpful. And then the last question is, In a situation or hypothetical world where demand were to accelerate into next year, then how do you start to think about incremental margins?

Well, I really like that hypothetical view you present, so hopefully it comes to fruition. You know, I think that one of the things that I think is always helpful for people to think about how margins evolve in our business is is just to look at the seasonality across quarters. Now, it varies by segment, but if you look at the fourth quarter, which is traditionally our weakest of the year, and then compare it to the first or second, it can give you a better sense of how margins can be influenced by simply top-line growth. So that's a good starting point. But certainly, I think there is more going on than that right now. with respect to better pricing and cost reductions and mix improvement that I think can help us do even better than that. So, you know, if you go back to our last investor day, you know, what we said about margin expansion is that it's going to be heavily driven by sales growth in the long term. Obviously, what we're experiencing right now is some benefit from these other actions, but I think that's a good way to, you know, do some of that homework and maybe put that into perspective on What happens when the market comes roaring back?

Okay, great. Thanks, guys.

Thank you. Our next question comes from Rosemarie Morbelli with G Research. Your line is open.

Thank you. Good morning, everyone. Good morning. I was wondering if you could give us a little better feel for what contributed to fiber lines better expectation than you previously thought when you bought it?

You know, really, I can't get into the intricacies, if you will, of the earn-out adjustment that Brad talked about and we disclosed. You know, at the time of a deal, you just have to make your best estimate really about the near-term performance and how an earn-out will ultimately get paid out when it does. And so You know, look, they're having a great year. It is entirely driven by, you know, the fiber optic wire cable applications. And if I were to cite one particular factor that was better than we expected, it's probably that underlying demand in that area really hasn't been impacted by some of all this other macroeconomic noise that's going on. That doesn't mean that it can't, but it hasn't been to date, and so that's probably the single greatest factor.

Okay, thanks. And then you keep mentioning seasonality, but construction, given the slow start for the year, should still show continuing improvement in the third quarter versus the second quarter. And I say I'm totally wrong, of course. But wouldn't that be the case this year? I mean, the third quarter is still a construction seasonality, you know, strong seasonality type of environment. So which other areas are you being impacted in the third quarter?

Well, look, I will tell you that over the last 11 years of my time here, it's probably one. If I just look at construction-related business, the second quarter is the strongest. Third quarter is the second strongest. First, fourth. So it's two, three, one, four. I don't expect that to change. Given how slow things started out in the first part of this year, you might conclude that more activity takes place in Q3. That's possible, but at the same time, it could just be that there's a delay in projects and that gets pushed out to Q4 next year. I think we really need to see how that happens, and so potentially there could be a little less seasonality than what we've seen because of that catch-up effect, but I haven't seen that yet.

Okay, so in your projections, you are anticipating the same seasonality as in the past.

Well, I am, but I would say that if you went back to where we were at the end of the first quarter and some of the comments we made at that time, my expectations for the performance of PP&S segment is better now than it was then. So that's a good thing, but I think that's captured already in sort of our perspective on EPS growth for the company for the full year.

Thanks, and just quickly for Brad, I didn't catch the number of shares you bought back either year-to-date or in the second quarter, Brad, if you could give me that number.

Yeah, absolutely. In the second quarter, we bought back a million shares at an average price of $26.91.

And do you mind giving me the year-to-date?

That's the same. We didn't buy shares in the first quarter.

All right. Great. Thank you.

Well, thanks, Rosemarie, and thanks to everyone who joined us on the call today. We appreciate your time and attention this morning and your continued investment interest in Poly1. Look forward to updating you on our results at the conclusion of our third quarter. Take care.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.